Can Distell turn itself around?

Distell has created a new company for its premium wine assets, reports Michael Fridjhon. Will the new direction lift performance?

Libertas Vineyards and Estates

When Distell, South Africa’s largest wine and spirits producer, announced it was creating a new company for its premium wine business, the local market reacted with a mixture of interest and scepticism. Hard on the heels of Libertas Vineyards and Estates’ launch, newly appointed Libertas CEO Kay Nash said she was considering opening the Nederburg Auction (one of business’s assets) to all key players in the industry as a unified platform for the sale of the Cape’s fine and rare wines.

Aiming for the top

The Libertas portfolio includes Alto, Nederburg, Durbanville Hills, Plaisir de Merle, Pongrácz, Fleur du Cap and Allesverloren as well as the heritage assets of Chateau Libertas and Zonnebloem. Several of these brands are in the top ten by volume in the domestic premium and ultra-premium markets.

The decision to reposition the Nederburg Auction within the broader context of the Cape wine industry appears to recognise that even Distell’s most desirable labels have lost ground to the newcomers crowding the top end of the South African market. While the auction is a valuable platform – it is the longest running event of its kind in South Africa – sharing it in an open and transparent way with other key industry players is not entirely an act of altruism. Clearly Nash is aiming to participate more actively in the super-premium sector to ensure a spill-over effect for the Libertas brands. “We have started the premiumisation journey at all levels in the business, from fine wine skills to brands and brand experiences, portfolio structures, ways of working and new collaborations, and global routes to market,” she says.

Rejigging the Distell fine wine business will not be simple, and it will involve culling brands as well as consolidating production and managerial functions. Nash is already working to replace four secondary production sites with a single central set-up at Nederburg in order to bring greater efficiency to the supply chain. “We have eight brands and 40 sub-sub-brands operating in 88 markets globally across 22 grape varietals, and spanning 384 SKUs,” she says. “The cost of this complexity is significant and it hinders our ability to focus and support winning propositions.”

The problem

The under-performance of Distell’s wine assets has long been of concern to shareholders. The merger out of which Distell was born dates back to 1979, with the formation of Cape Wines and Distillers. It brought together the wine and spirits interests of all the major companies in the South African liquor business. At the time these were Stellenbosch Farmers’ Winery (SFW), which had been owned directly by South African Breweries (SAB), and Distillers Corporation, ultimately controlled through the Rembrandt Group by the Rupert family of Richemont fame.

Until the 1980s, SFW had dominated wine sales in South Africa. It owned the most important brands across all segments of the market, and managed the marketing and logistics of high-volume wine distribution with the same skills that it applied to the beer business. When SAB yielded control of SFW in exchange for the beer assets of the Rembrandt Group, some of these brands began to decline. By the time Distell was established in its present incarnation almost 20 years ago, wine had ceased to enjoy serious management focus.

At the time, the company was experiencing a sales boom in the two other sectors in which it was heavily invested – ciders and brandy. At the turn of the 21st century, locally distilled brandy was the largest spirits category in South Africa, accounting for more than 5m 9-litre cases annually. Distell owned all of the major labels. Its cider brands dominated this growing segment.

In the meantime, the wine market had transformed and was no longer susceptible to the FMCG strategies the breweries had applied with such success a few decades earlier. In the 1980s, more than 80% of all grapes grown in South Africa were crushed at co-operatives. The bulk wine was sold to major wholesalers and blended into high-volume brands that dominated the market. By the late 1990s, in the aftermath of the end of political isolation, hundreds of newcomers began building wineries and taking over the vineyards which had previously supplied the co-ops with fruit.

Inevitably, wine marketing had become more nuanced than it had been in the days when the SFW labels occupied the top-selling slots at every price level. Confronted with the reality of this changed environment, Distell’s management directed its attention to its most profitable divisions, and left the wine businesses to founder.

As less effort was invested in wine, sales and margins deteriorated; volume targets were reduced, and discounting to achieve these objectives compromised the image of long-established names in the domestic and international markets. For many it seemed as if Distell’s most venerable brands had entered a death spiral.

Libertas Vineyards and Estates has been presented as a solution to this problem, a dedicated vehicle whose sole focus will be to manage the fine wine assets which had once been a cornerstone of the company’s offering. The decision to hive off the fine wine operations was anything but a knee-jerk reaction to a problem which had been the focus of increasingly strident criticism from analysts, as well as Distell’s shareholders. Company insiders suggest that planning for this complete separation of Distell’s premium wine assets began several years ago. Delays around implementation related partly to the complexity of the divorce, partly to the number of properties involved (some of which were not wholly owned subsidiaries of Distell) and partly to other priorities which confronted Distell CEO Richard Rushton when he took the reins in November 2013.

For a start, he had his hands full dealing with the decline in the South African brandy market and the impact on Distell’s cider brands of Anheuser-Busch InBev’s acquisition of SABMiller in 2016. The slow but now solid-looking recovery of the brandy business provided some much-needed room to manoeuvre. Rushton also used the time to tidy up Distell’s peripheral wine assets: several estates have been sold off, the winemaking team has been streamlined, and a joint venture business called Lusan has been divvied up.

What remained were the group’s core wine assets, easily separated into high-volume brands with a relatively uncomplicated interface with the market, and the long-established premium wine properties. The decision to house these in a standalone vehicle, with its own management team, and connected to Distell only by way of logistics, has taken time to achieve.

The market’s immediate response to the news has been strongly positive. The Distell share price has risen 30% over the past five months, with most of that increase coming in the weeks following the Libertas launch announcement. While there are no doubt other factors driving up the price, and the market’s perception of the business, it is clear that the creation of a more focused premium wine company has been well received.

Will it work?

This does not mean that Nash will find the next few years plain sailing. The local liquor industry has long been cynical of Distell’s motivations. While the co-operative approach of inviting participation in the Nederburg Auction will be seen as an olive branch, the buy-in of key players is not guaranteed. Resistance within Libertas and within Distell should also not be under-estimated: it won’t be a simple task to transform a multi-layered behemoth in which inefficiencies have piled up over the years. Middle management empire builders do not willingly dismantle the colonies they rule over. In the midst of one of the longest and deepest recessions in South Africa’s modern history, there are endless opportunities for recalcitrant employees to blame the economy for sluggish implementation of reforms and a slower-than-expected delivery of results.

Nash has the vision, competence and management experience to produce a lean and streamlined machine at Libertas and to overcome the corporate inertia she will inevitably encounter. Distell’s shareholders have given the new entity their blessing, and appointed a CEO who knows how to get the job done. Now both need patience and resilience: the winds of change are often little more than a gentle breeze, but sometimes they gust into tempests.